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Builder confidence fell in August as market conditions, including mortgage rates nearing 7% and high shelter inflation, have negatively impacted housing affordability and consumer demand. The decrease in August marks a reversal after seven consecutive months of increasing builder confidence to start 2023.

Builder confidence in the market for newly built single-family homes in August fell six points to 50, according to the NAHB/Wells Fargo Housing Market Index (HMI). A number over 50 indicates more builders view conditions as good than poor.

“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots, and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” says NAHB chairman Alicia Huey. “But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many home owners elect to stay put because they are locked in at a low mortgage rate.”

Rising mortgage rates are causing more builders to use sales incentives to attract and entice prospective home buyers, according to results from the August HMI survey. The share of builders using incentives to bolster sales was 55% in August, a 300-basis-point increase from July but lower than the 62% share in December 2022. After falling to as low as 22% in July, the share of builders cutting prices to bolster sales rose to 25% in August. The average decline for builders reducing prices was 6%

“Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%,” says NAHB chief economist Robert Dietz. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.”

The NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either “good,” “fair,” or “poor.” The survey also asks builders to rate the traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” Scores for each component are used to calculate a seasonally adjusted numerical index value.

All three HMI indices posted month-over-month declines in August. The HMI index gauging current sales conditions fell five points to 57, the component tracking sales expectations for the next six months fell four points to 55, and the gauge measuring traffic of prospective buyers dropped six points to 34.

On a regional basis, the three-month moving average HMI in the Northeast increased four points to 56, the West fell a single point to 50, and the Midwest and South were unchanged at 45 and 58, respectively.